Author: sgstofka

Competition

Leave a comment

July 11, 2021

by Steve Stofka

This week President Biden issued an executive order (White House, 2021) to counter the trend toward corporate consolidation and oligarchy that has arisen during the past decades. I appreciated that the report contained links to the outside data sources they are using. After almost six months in office, Mr. Biden has signed 51 orders, almost half of them rescinding the orders of former President Trump (National Archives, 2021). In 2017, Mr. Trump signed 55 orders total but only eight of those were rescinding orders. The pace of orders slows after the first several months in office. I’ll review some highlights from this order.

For the past decade inflation has been below the Fed’s 2% target but the trend toward consolidation in some key industries gives those few companies that dominate an industry greater pricing power. Modern Farmer reported that 80% of the meatpacking industry is controlled by just four companies (Nosowitz, 2020). In 2000, the top 20 home builders controlled 15% of the market. Today it is 30%. Mr. Biden’s order notes that mark-ups, the charges over a company’s cost, have tripled in recent years. Since 2010, Federal Reserve data (2021) shows that after-tax profits have increased almost 50%, substantiating the claim of higher markups. In the past decade, low interest and rising profits have fueled a tripling of the stock market.

For the ten years following 9-11, after-tax profits also tripled, despite the worst financial crisis since the Great Depression in the 1930s. Many financial companies lined up at the corporate soup kitchen in Congress and were bailed out. Homeowners and workers went hungry while Congress paid bonuses to the same speculators that sparked the crisis (Story & Dash, 2009). Sorry, folks, we had to honor the contracts, the politicians in Washington said. It’s the law. Who helped write the laws? The corporations that got bailed out.

The order notes the growing increase of non-compete agreements for new job hires, making it more difficult to move to a more attractive job. It references data from the Economics Innovation Group (EIG, 2021) that the rate of new business formation has sunk by half in the past fifty years. The shift of manufacturing to China has also contributed to the overall decline.

The report notes the upswell in occupational licensing requirements over the past several decades. Licensing appears to be about public safety and some of it is. The states have come to depend on the revenue from the licensing fees and it avoids having to raise some taxes on voters. Trade schools that certify beauticians and other occupations like the tuition revenue they receive. Established business like licensing because it keeps out competition. The benefits are widespread and the costs are concentrated to those seeking careers in those occupations, many of them blue collar and little political power.

There are many faults in our federalist system that an executive order cannot remedy because the Constitution gives a lot of power to the states. What it can do is bring more attention to these anti-competitive practices. New Zealand and Singapore top the World Bank’s list of countries with low obstacles to doing business. The U.S. is sixth, just behind S. Korea and a few places ahead of Norway.

Americans believe in American exceptionalism but the Nordic countries keep beating us in various international categories. People say “You Americans. You should be more like the Nordic countries!” Suck on it, Norway, Finland and Sweden. We are ahead of you in ease of doing business. Next year we’re going to take on S. Korea and after that, tiny Denmark. There is nobody more capitalism loving than America and we’re going to prove it by stopping some of these anti-competitive practices!

/////////////////

Photo by Pietro Mattia on Unsplash

EIG. (2020, June 29). Dynamism in retreat. Retrieved July 11, 2021, from https://eig.org/dynamism

Federal Reserve. (2021, June 24). Corporate profits after TAX (without IVA And ccadj). Retrieved July 11, 2021, from https://fred.stlouisfed.org/series/CP.

National Archives. (2021). Federal Register: Executive orders. Retrieved July 11, 2021, from https://www.federalregister.gov/presidential-documents/executive-orders/joe-biden/2021

Nosowitz, D. (2020, June 09). DOJ reportedly Subpoenas ‘Big Four’ Meatpackers. Retrieved July 11, 2021, from https://modernfarmer.com/2020/06/doj-reportedly-subpoenas-big-four-meatpackers/

Story, L., & Dash, E. (2009, July 30). Bankers reaped lavish bonuses during bailouts. Retrieved July 11, 2021, from https://www.nytimes.com/2009/07/31/business/31pay.html

Van Dam, A. (2019, October 19). Increasingly, economists find, homebuilding in fewer hands. Retrieved July 11, 2021, from https://www.providencejournal.com/news/20191019/increasingly-economists-find-homebuilding-in-fewer-hands

White House. (2021, July 09). FACT sheet: Executive order on promoting competition in the American economy. Retrieved July 11, 2021, from https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/

True Independence

Leave a comment

July 4, 2021

by Steve Stofka

On this Independence Day holiday. I’ll add a few historical tidbits I read recently. Beginning in 1775, Americans fought with each other, with the British and Indians. It was our first civil war. Even the British were shocked at the atrocities that Patriots committed on other Americans. From New York to South Carolina, farmers who wanted to remain neutral were regarded as traitors, Loyalists who favored the monarchy. In their outrage, colonial militias pillaged farms and crops, burned homes and families. Farmers in New York fled to Canada.

In the middle of this civil war, the colonies published the Declaration of Independence. It was carefully edited so that it fit on one printed page and could be posted on tavern and courthouse doors. John Adams, who would become the second President of the United States twenty years after the Declaration, called it a “Theatrical Show” (Taylor, 2021, p. 160).

The mood for independence quickened at the publication of Thomas Paine’s Common Sense in January 1776. At the time of its publication, the author was anonymous and many thought it was Adams who had written it (McCullough, 2008, p. 83). Adams was rather critical of the Biblical claims made in Common Sense, but he recognized the emotional appeal of its plain spoken diatribe against monarchy.

A declaration on independence would give the colonies some legitimacy in the eyes of France and Spain, who might be able to help the desperate colonies. Unlike some of his peers in the Continental Congress, Adams thought the war against Britain might drag on for ten years. When British General Cornwallis surrendered at Yorktown eight years later, half of Washington’s army troops were French. The navy that closed off Cornwallis’ retreat was French (Taylor, 2021, p. 294). In the struggle of global empire, anything that weakened Britain was in the best interest of both France and Spain.

The majority of American colonists did not want independence. A third of the population were Loyalists who appreciated the Parliamentary order and military protection of British rule. A third of the population didn’t care. A  third wanted independence (Taylor, 2021, p. 212). As in the later civil war, many small farmers resented the big plantations owners who bought their way out of the war, paying a fee to avoid military service for themselves and their sons.

In 5th grade history class, we don’t learn many of the messy details of our history. The school boards want to avoid controversy; teachers want to avoid conflict between students. They prefer textbooks that emphasize the tragedy of war and praise negotiation to settle differences. After all, the teachers are repeatedly encouraging students to “use their words.” Even in high school, much of the ugliness and confusion is left out. In a full historical account, there are few clear moral lessons.

When we read some of these details as adults, some of think it is “revisionist” history because that information conflicts with the child’s view of history we were taught. In the 1992 movie A Few Good Men Jack Nicholson says, “You can’t handle the truth!” It’s true. We were taught a romanticized version of history, carefully edited to make sense to young people.

Some adults hold onto their cherished myths the way the Peanuts character Linus cuddled his blanket. They are today’s Loyalists – loyal to the monarchical rule and order of myth. Some of us declared independence from those myths and welcome the historical accounts, beautiful or ugly. We celebrate our independence from fanciful myth.

///////////////

Photo by Darix Garcia on Unsplash

McCullough, D. (2008). John Adams. New York: Simon & Schuster.

Taylor, A. (2021). American republics: A continental history of the United States, 1783-1850. New York, NY: W. W. Norton & Company.

A Bridge Between Us

Leave a comment

June 27, 2021

by Steve Stofka

We are social creatures, our brains wired for comparing our situation with those around us. Children look only at the height of liquid in a glass and reason that the higher level is “more.” We understand tall and big and a lot. As our brains mature, our primitive understanding of equity evolves – a little. This week, a coalition of Senators reached an agreement in principle to spend money on infrastructure, a solution that has frustrated several presidents before Biden.

In 2007 the I-35W bridge in Minnesota collapsed. In March 2009, at the lowest point in the financial crisis, the American Society of Civil Engineers released their quadrennial report card on the nation’s infrastructure (2009). During the decade, infrastructure had slipped from a ‘D+’ to a ‘D.’ With millions out of work, the public and then President Obama hoped that the Congress could assemble an infrastructure bill. Couldn’t the government give money on a per capita basis to each state and let them spend the money on needed repairs and building projects? Less populous states argued against that idea. In the end, nothing happened.

In 1985, Congressman James Howard and Colorado Senator Gary Hart introduced versions of a National Infrastructure Act that died in the Committee on Environment and Public Works. In the decade from 1971-81, Howard noted that spending on infrastructure had declined by 50% (1985). Republicans held the Senate and Presidency; Democrats held the House. Other infrastructure bills have died in that same committee.

The U.S. built the nation’s interstate highways to deploy weapon systems in case of an attack from Soviet Russia. Without that direct threat, our elected representatives have been unable to coordinate unified action. Our federalist system promotes impotence, an antiquated political structure that will cause the U.S. to take a back seat on the global stage, according to China’s leader Xi Jinping. After fifty years of ineptitude, will the U.S. Congress and White House prove Xi wrong?

////////////

Photo by Manny Ribera on Unsplash

American Society of Civil Engineers (ASCE). (2009). 2009 report card for America’s infrastructure. doi:10.1061/9780784410370

Howard, J. (1985, January 01). The national infrastructure act. Retrieved June 26, 2021, from https://cedb.asce.org/CEDBsearch/record.jsp?dockey=0043747

Bring Back Earmarks

Leave a comment

June 20, 2021

by Steve Stofka

For the past decade gridlock in the Congress has often led the news, each side of the political aisle holding those in the other party responsible for the lack of bipartisanship. This week the two parties came together to make Juneteenth a holiday. In the House, a number of Republicans joined with Democrats to vote on a bill which would rein in the oligopoly reach of some tech giants like Google and Amazon. The public has become so accustomed to entrenched party positions that such collaborations grab headlines. How can the two parties reintroduce more bipartisanship? Reengage a practice that was formally but not actually discontinued a decade ago – earmarks for House and Senate members. Two powerful Democrats in the House and Senate have pledged to formally readopt the practice in 2022. House Republicans have agreed, but Senate Republicans have not committed to the renewal of earmarks (CAGW, 2021, p. 1).

Earmarks are persuaders, spending items inserted in a bill to gain crucial votes in the House or Senate. It helps incumbent representatives who compromise on  legislation resist a primary challenge from the more extreme wings of their party. With the gain of a spending earmark for their district, an incumbent appears as a smart political trader, not an unprincipled compromiser. For most of American history, earmarks were the bread and butter of practical politics.

Scandals surrounding earmarks contributed to the Democrats losing the House in the 1994 election. During their 40-year control of the House from 1954-1994, Democrats had used earmarks to hold the disparate elements of their party together. In the early 1990s, an investigation into Dan Rostenkowski, the powerful Democrat chairman of the House Ways and Means committee, brought too much attention to the political bargaining that took place in Washington. At the conclusion of the investigation into what was known as the Post Office Scandal, Mr. Rostenkowski was sentenced to almost two years in prison. Holding aloft his Contract with America and promising greater fiscal responsibility, firebrand Republican Newt Gingrich used the scandal to wrest control of the House from the Democrats in the 1994 election.

Despite his rhetoric Mr. Gingrich understood the role of earmarks. Like axle grease they were ugly and messy but reduced friction in the electoral machinery of Congress. They helped members fend off primary challenges, which were becoming more frequent after the Federal Communications Commission ended the Fairness Doctrine in 1987. Without the constraint to present balanced opinions, new media outlets gained attention and audience by taking strong positions on the topics of the day. The most successful of these was Rush Limbaugh who launched his show the year after the Fairness Doctrine was ended. People who wanted moderate voices could tune into traditional outlets. Those with strong conservative views  tuned into Limbaugh and other hosts who courted controversial opinions. Mr. Gingrich had played to these extreme elements in his bid to take the House but understood that earmarks were essential tools in governing a political coalition.

When John Boehner became the Republican majority leader in 2005, he pledged to curb the practice of trading earmarks for votes but they continued in the appropriations committees. In the eleven years since Republicans had taken control of the House, earmarks had grown tenfold (Bogie, 2018, p. 3). Two recent scandals involving members of the Republican Party had drawn public attention to the tawdry side of pork barrel politics. Mr. Boehner’s show of principle was calculated to help the Republicans retain their image as fiscal conservatives and continue their control of the House in the 2006 election. The public was tired of Republican missteps and profligate war spending and Democrats regained control of the House in 2007.

Under Nancy Pelosi’s Speakership, earmarks fell by half, but the financial bailout and the threat of big government spending under Obamacare sparked a Tea Party movement that helped Republicans take back the House in the 2010 election. Responding to public sentiment, Mr. Boehner announced a formal moratorium on earmarks and for two of the four years of his Speakership there were no earmarks (Bogie, 2018, p. 3). After his retirement in 2015, the earmarks continued. Hoping to bolster their chances in the 2020 elections, Republican Senators formally adopted a resolution against earmarks in 2019. In two crucial elections in Georgia, they lost control of the Senate anyway.

An argument for a reduction in earmarks has been prudent management of the public’s money. Good intentions, bad results. Instead of spending relatively small amounts to bolster an incumbent’s chance of re-election, a reduction in earmarks has contributed to an explosion in the deficit. In addition, the reduction has contributed to the polarization in Congress. The success of primary challengers rests on principle. The longevity of incumbents rests on pork, “bringing home the bacon” to their constituents.

Earmarks help those in the center hold the center. Without earmarks, the center has collapsed. Is it time to hold our noses and admit that a principled stand against earmarks has not stood the test of history? Can Democratic Senator Leahy and Congresswoman Rosa DeLauro overcome the bad optics of restoring earmarks? In the front room, politicians espouse grand principles. In the back room the ugly art of bargaining begins. Halos in the front room, horns in the back.  Like cleaning out sewer lines, politics is a dirty job. It’s about time someone unplugged the sewer lines in Congress.  

/////////////////

Photo by McGill Library on Unsplash

Bogie, J. (n.d.). Earmarks Won’t Fix the Broken Budget and Appropriations Process (Backgrounder, Publication No. 3353). Heritage Foundation. doi:https://www.heritage.org/sites/default/files/2018-09/BG3353.pdf

CAGW. (2021, April 14). 2021 congressional Pig Book. Retrieved June 19, 2021, from https://www.cagw.org/reporting/pig-book

Safety Net or Trap?

Leave a comment

June 13, 2021

by Steve Stofka

It has been 200 years since the cloth mills in Massachusetts instituted the “Lowell system,” employing young women and taking half of their pay for company provided room and board (Taylor, 2021, p. 234). 100 years ago, the states ratified the 16th Amendment, permitting the federal government to tax all income, including worker’s wages and salaries. 70 years ago, the government instituted payroll withholding. Today 145 million American workers receive salaries or wages, of which 30% is withheld by employers and sent to the federal government (Bird, 2021). Have we all effectively become government employees leased out to employers?

“Shan gao, huangdi yuan” is an ancient Chinese saying that reflected the attitude of many Chinese toward a central authority: “The mountains are high, and the emperor is far away.” Until the enactment of the 16th Amendment in 1913, most Americans felt the same. In Article 1, Section 8, the framers of the Constitution built a corral around the power of the federal government. The ink was barely dry on the document when Federalists like Hamilton argued for an interpretation of the Constitutional language that would give the federal government more power. In the next two decades, the Supreme Court headed by John Marshall, an appointee of Federalist President John Adams, did just that (Taylor, p. 54). During his 35-year tenure as Chief Justice, the decisions of the Marshall court effectively restated the Constitution.

Still, the federal government’s reach was limited enough that it took an amendment to that Constitution to permit the federal government to tax U.S. citizens directly. Richard Byrd, a delegate from Virginia and an opponent of the 16th Amendment, warned that “A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . .” (Tax Analysts, 2021). He warned that the new amendment would feed the growth of a Washington bureaucracy remote from the interests of ordinary people. Many of those living today have great-great grandparents who voted for that amendment. Why did they consent?

When the 16th amendment to the constitution was ratified more than a century ago, the IRS enacted a system of withholding. Employers complained and the withholding provision was repealed a few years later in 1917 (Higgs, 2007). Most people who did owe taxes paid only 1% in quarterly installments the year after they incurred the tax burden. During WW2, the federal government wanted more revenue to support the massive wartime spending, and instituted withholding for income taxes.

The federal government employs almost 9 million workers (Hill, 2020), about 6% of the total workforce, but its effective reach is so enormous that employers today only borrow workers from the federal government. Each employer must abide by so many employment regulations that even a small business has to dedicate at least one person to administering regulations. The hiring of an employee initiates an implicit contract not between the employer and employee, but between the employer and the federal government. The employer faces stiff penalties for violating any provisions of that implicit contract. How has the tentacled reach of the federal government affected employees?

Like the young women at the Lowell mills, workers are not allowed to touch their pay until taxes, insurance and fees have been withdrawn. Some taxes are silent, withdrawn by lowering gross pay. After state and local taxes and the employee portion of health insurance is deducted, a worker today may be left with only half their pay. Unlike the women at the Lowell mills, the federal government does not provide room and board for most workers. As Richard Byrd warned a century ago, a federal government is only remotely concerned about those needs. Instead, it takes from the worker in the now and gives back to the worker in the future after forty years or more of work – a pension and medical care after retirement.

In addition to future needs, a worker’s taxes feed a bureaucracy that safeguards the security, wealth and needs of the upper 20%, and selected regional interests. Like the Chinese emperor, the $1 trillion spent on current military needs and past military promises seems far away from the daily security needs of most Americans. That spending  supports local economies in some regions and may be the key economic base in some rural communities who strongly support military spending to maintain a global empire. After all, their local economic security depends on such spending.

Larger than Amazon’s football sized warehouses is the largest warehouse in the nation run by the federal government. It is bounded not by walls but by a web zealously tended by lawyers and regulators, and inescapable for most employees and employers. The restrictions and harsh working conditions of the Lowell mills strike us today as paternalistic exploitation. The parents of the young women welcomed the discipline and extra money that their daughters earned. The hard work instilled moral character in the women before they returned home to marry a local lad.

Many of us today welcome the paternal oversight of the federal government as a safety net. The children of our children 200 years from now will certainly regard this age differently. Will they see the complex net of laws that bind employees and employers as a safety net or a trap?

///////////////

Photo by Fikri Rasyid on Unsplash

Bird, B. (2021, May 26). How much does the average American pay in taxes? Retrieved June 11, 2021, from https://www.thebalance.com/what-the-average-american-pays-in-taxes-4768594.

Higgs, R. (2007). Wartime Origins of Modern Income-Tax Withholding. The Freeman, (November). Retrieved from https://admin.fee.org/files/doclib/1107higgs.pdf. Also, see IRS history Timeline (2021) and LOC (2012).

Hill, F. (2020, November 05). Public service and the federal government. Retrieved June 11, 2021, from https://www.brookings.edu/policy2020/votervital/public-service-and-the-federal-government/

IRS. (2021). IRS history Timeline. Retrieved June 10, 2021, from https://www.irs.gov/irs-history-timeline

Library of Congress (LOC). (2012). History of the US income tax. Retrieved June 10, 2021, from https://www.loc.gov/rr/business/hottopic/irs_history.html

Tax Analysts. (2021a). The Income Tax Arrives. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/THM1901?OpenDocument. For PDFs of original tax forms that your great-great-grandparents might have filed, see

 U.S. 1040 Tax Forms, 1913 to 2006. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/1040TaxForms?OpenDocument

Taylor, A. (2021). American republics: A continental history of the United States, 1783-1850. New York, NY: W. W. Norton & Company.

Being Left-Handed

Leave a comment

June 6, 2021

by Steve Stofka

This past week we recognized the 100-year anniversary of the massacre and destruction of an entire black neighborhood in Tulsa. We struggle to talk constructively about racial hatred and injustice, willing to look back in history but not look at those same forces in our current circumstances. Ongoing practices and attitudes favor some at the disadvantage of others, an ugliness of human nature that we want to keep imprisoned and invisible. Given that reluctance, I thought I would approach the subject from a different angle, one that readers can better tolerate.

Left-handers live in a right-handed world. Approximately 1 in 10 people are left-handed,  outnumbered by a majority of right-handers who make the design rules. If lefties cannot use scissors properly, they are clumsy. Here, let me show you how to do it, a righty says. China, the global leader in manufacturing, does not make left-handed scissors. All children are taught how to use right-handed scissors. In many Asian countries, people perceive lefties as aberrant so that left-handedness goes underreported (Kushner, 2013).  

Designed for right-handers, safety guards on cutting tools do not adequately protect left-handed operators and result in more injuries (Flatt, 2008). This reinforces the notion that there is something wrong with left-handers. They are not mindful. It is their fault, not a peculiarity of the machine’s design. Surgeons who are left-handed require a longer learning curve to adapt to right-handed stents, forceps and cutting instruments. Even those learning to shoot a rifle must make some adaptations that right-handers take for granted.

Lefty loosey, righty tighty seems like an easy mnemonic to a right hander, but difficult for a left hander who watches and mirrors a right-hander open or close a jar lid. At a family gathering, the family seats the kid with the left-handed arm at the corner of the dining table, away from the center of conversation. American teachers would force left-handers to write with their paper turned the same way as right-handers, forcing many left-handers to curl their wrist into the shape of an ‘f’ in order to keep their letters on the line. Left-handers are systemically marginalized and righties are blissfully unaware of the practice (Coren, 1993). Paul McCartney, one of the Beatles, played a left-handed bass. Who knew they existed? Most lefties were taught how to play a guitar the “proper” way, which was right-handed of course.

Decades ago, parents and educators in western European countries thought that a child’s handedness could be repatterned. Take the spoon out of the child’s left hand and put it in their right hand. When they use a play hammer to tap in wooden shapes, take it out of their left hand and put it in their right hand. Don’t let them salute the flag with their left arm. Make them do it with their right. A left-hander who could not retool their brain was regarded as stubborn or subversive.

The majority in a community feels an entitlement to have it their way, but especially so in a democracy where everyone gets a vote. The majority dominates and even persecutes the minority. Charles Darwin noticed that finches drive out those born with a different beak or plumage, the majority acting to preserve key distinguishing qualities. Humans use skin color, language, political and religious beliefs to separate “us” from “them.” Beliefs can change but skin color is hereditary and language or accent is embedded in us as children.

“Look, this is a right-handed world,” say the righties to the lefties. If the majority can be discriminative against left-handers, imagine how much worse it is for those with other hereditary traits. Like Darwin’s finches, the majority white population excludes black people from living in certain neighborhoods and treated black families with hostility when they were traveling on vacation (Burton, 2012). The majority withholds resources – credit and job opportunities – from black people because they have the wrong “plumage” or their “beaks” are  too large. Our brains have grown large but our primitive behaviors emerge from our bird brains. We must evolve and become human.

////////////

Photo by Kelly Sikkema on Unsplash

Burton, Ph.D., N. (2012, July 12). How Did Blacks Travel During Segregation? Retrieved June 04, 2021, from https://cobb.typepad.com/files/root_green_book-1.pdf

Coren, S. (1993). The left-hander syndrome: The causes and consequences of left-handedness. New York, NY: Vintage Books.

Flatt, A. E. (2008). Is being left-handed a handicap? The short and useless answer is “yes and no.”. Baylor University Medical Center Proceedings, 21(3), 304-307. doi:10.1080/08998280.2008.11928414. Caution: some photos of hand injuries may be disturbing.

Kushner, H. I. (2013). Why are there (almost) NO Left-handers in China? Endeavour, 37(2), 71-81. doi:10.1016/j.endeavour.2012.12.003

A Worker’s Costs

Leave a comment

May 30, 2021

by Steve Stofka

As an employee, a worker moves between the “work box” and “life box” each working day. The business builds the work box and defines the boundaries for the worker. A worker who is a business and thinks like a business must build a box that incorporates work and life, with a moveable wall between the two. That worker must be more conscious of total production costs or they go out of business.

Almost half of this country’s output is produced by micro and small businesses owned by a few people who take an active part in the business and have their personal fortunes are at stake. Integrating and balancing work and personal life is especially difficult and economic models don’t incorporate the distinct dynamics of these companies. Politicians on both sides of the aisle pay lip service to small business but the substantive beneficiaries of most policies are medium and large businesses who spend heavily to influence lawmakers. Forced to work from home, workers in large companies experienced the production process much like the owners of small businesses. The world’s attention was drawn to a worker’s total costs of production. Will lawmakers and economists finally incorporate the interests and concerns of workers and small businesses?

In economic models there are two inputs to production, capital and labor. In the short-run, capital costs such as plants and equipment are fixed and labor costs are variable. What are the worker’s capital costs of producing that labor? An investment in a home or apartment, in transportation, and in human capital – education, training and past experience. In mainstream economic models, an investment in a home is recognized as an investment, but not as an input to the production of labor. The compensation for the human capital that a worker invests in production is supposedly included in the wage the worker receives. Tax law disregards the costs of housing unless they are traveling expenses away from the primary place of business. How the worker replenishes their physical and emotional needs when they are not at work is not a concern for economics, the Congress or the IRS.

What are a worker’s costs to produce their labor? In the  short-run, six months or less, a worker has supplier costs that are either fixed or “sticky,” variable obligations that are difficult to shed. They have leases and financial obligations for living and transportation, for childcare, for education and other commitments to family. For small business owners and many workers during the pandemic, space in the house must be set aside for work activities. In tax law and economic models, those fixed and variable costs are largely disregarded.

Subchapter S corporations are small businesses usually owned by a few shareholders who take an active part in the business. According to the IRS, there are five million S corps. In 2017, they filed 4.7 million returns accounting for $8.1 trillion in  business receipts. In that same year, more traditional C corporations filed only 1.6 million returns, but accounted for $21.2 trillion in business receipts (IRS, 2021). Even though larger corporations were only a third of small businesses, they produced almost three times the receipts.  

Larger companies leverage that volume to win favors in Congress and state capitols around the country, and those benefits come at the expense of smaller businesses. In political science and economics, it is known as “concentrated benefits, diffuse costs,” a groundbreaking insight of Mancur Olson in 1965 (2014). The few who receive the bulk of the benefits lobby hard to protect them. The many who pay the price are hurt but not crippled by the costs and do not fight as hard for change. Olson challenged the popular notion that the majority always oppresses the minority in a democracy, showing how a minority often controls many agendas. The pandemic has highlighted the plight of the majority of workers in large and small businesses.

In 2017, C Corps deducted 98% of their total business receipts (Table 2.3). S Corps deducted 94% of receipts, but there are also costs of production that a small business owner absorbs because the deduction is either disallowed or requires too much effort to substantiate for the cost of the deduction. For employees, the rules are stacked against them. A worker making $60K per year gets a standard deduction of $12,400, or 20% of their total receipts. If an employee were able to deduct their total costs of production, that standard deduction might be more than $50,000. Employees would pay far less income tax and this would put political pressure on large businesses to pay more taxes. How do a minority of large businesses control the fate of an overwhelming majority?

In Marx’s analysis, the rules of property were a remnant of feudalism, where a small minority of aristocracy controlled the land, had a large influence in policy making, and most workers were agricultural peasants with little education. He thought capitalism was the most formidable force of production that mankind had invented but its rules of who got what were founded on the rules under feudalism – a few got most of the gains.

John Stuart Mill, a contemporary of Marx, agreed that property rights had their foundation in “conquest and violence.” Although a staunch defender of property rights, he acknowledged that the distribution of property was arbitrary and not equitable (Heilbroner, 1997, p. 135). He predicted a gradual transition to socialism where society would distribute the benefits from production more evenly to both the capital and labor responsible for that production.

Those who favor capitalism think that the owners of capital should keep all the profits from production. Those who favor socialism think that the inputs to production should determine the outputs, the profits, from that production. Many advocates on each side are convinced that they are “right.” Believers in capitalism may, like John Locke did in the 17th century, found their “right” on the Bible. Long before game theory was formally developed, both Marx and Mill understood that property distribution was decided by arbitrary rules, not some inherent right. Even Marx disagreed with his own followers in that regard, declaring that he was not a Marxist (Heilbroner, 1999, p. 151). Europeans transplanted their sense of property rights to America, where the acquisition of property was now founded on the three-legged stool of hard work, conquest and violence.  

Economic models and tax law were crafted in the environment of 19th and early 20th century industrial production. Capitalists needed workers as disposable cogs in the factory machine and there weren’t enough of them. Policymakers sold a dream to poor but hopeful people in far off countries but awarded all the profits to the capitalists. A lot of workers died in the fight for an eight-hour workday and prohibitions against child labor.

Programs like Universal Basic Income and other variants hope to alter the distribution of profits. Those who gain from the current arrangements naturally resist any change. Laws and attitudes are “sticky” and slow to adapt. The changes in work production during the pandemic may bring new awareness to the totality of the worker’s cost of production, but will that effect policy changes? Let’s hope so.

///////////////

Photo by Martin Sanchez on Unsplash

Heilbroner, R. L. (1997). Teachings from the worldly philosophy. New York, NY: Norton & Company. (p. 137).

Heilbroner, R. L. (1999). The Worldly Philosophers the Lives, Times, and Ideas of the Great Economic Thinkers (7th ed.). New York: Simon and Schuster.

IRS. (2021). SOI Tax Stats – Corporation Complete Report, Table 2.3. Retrieved May 28, 2021, from https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report. Table 2.4 contains the data on Subchapter S corporations.

Olson, M. (2012). The logic of collective action public goods and the theory of groups. Cambridge, MA: Harvard University Press.

Which Side

Leave a comment

May 23, 2021

by Steve Stofka

A simple economic model of production attributes equal shares to capital and labor. Why then do those who contribute the capital get to keep all the profits? In our political system, Republicans publicly advocate for the owners of capital. The political posture of the Democratic Party falls on the side of workers, but both parties often favor the owners of capital. Most of the 27 Republican led states are ending the Federal program of enhanced unemployment benefits, believing that a weaker bargaining position for workers will help business owners (National Law Review, 2021).

The combined batting average in the Major League Baseball this year is .235, near an all-time low. The ball is too dead, complain the action-oriented fans who think that the batters are the important producers of good baseball. They want more hits. Nonsense, say the fans who like a good defensive game. The pitching is better. Pitchers are the key producers. Nah, pitchers’ battles are too boring, say action-oriented fans. You want a lot of running around, taunt the defensive-oriented fans, go watch basketball. If we can argue this point about a sport, is it any wonder that we split into two political camps, those favoring capital and those favoring labor?

150 years ago, the economist Karl Marx asked why do the contributors of capital get to keep all the profits? Capitalists had more political power, an evolution of the system of property rights under feudalism. Under those arrangements, the workers were bound to the land and the landowners had all the power. Marx predicted that industrialization would continue to concentrate workers in urban areas, a radical prediction at a time when the economy was almost entirely agricultural. Through greater association, Marx thought that workers would command more political power and overthrow the system of property rights that gave capital most of the power (Marx, 1994, p. 169). Why hasn’t that occurred?

In our country, the owners of capital have prevailed, both politically and economically. Policies that favor workers are branded as communist or socialist, and in the minds of many Americans, the two are synonyms. Until a hundred years ago when Progressives enacted child labor laws, American industry, particularly cloth mills, depended on child labor. Before American independence, the colonies encouraged British courts to send them children to work in the linen mills (Abbott, 1908, pp. 18-21). The justification for laws and property arrangements that forced children to work was the Puritan belief that idleness is evil and subverts character and spiritual growth (Abbot, 1908, p. 15). Conservative values are the political form of Puritan religious beliefs.

It is no surprise that Puritan Republicans would favor laws that reduce the bargaining power of workers. They believe that it is better that a worker be employed at any wage than be idle. They can’t force workers to work – that would be slavery – so they construct a system of laws and property arrangements that “induce” workers to “voluntarily” enter employment. As a governing strategy, Republicans believe in less freedom for workers and more freedom for capital. Republicans have picked the side of capital.

Using the impetus of the social uprisings of the early 20th century, Progressives in the Republican Party helped enact greater rights for workers. In a “whose side are you on” split in the party, the Progressives broke away from the Republicans and joined forces with the Democrats in the 1910s. Republicans became the party that favored the owners of land and capital and that was the end of their ideological growth. They became a reactionary party, a party of “No,” acting with one mission – to curb the growth of Progressive policy proposals that changed the power dynamic. Republicans would be the Party of the Haves.

In The Discourses written 500 years ago Niccolò Machiavelli wrote that in any society there are two factions, the “haves” and the “have-nots.” In a discussion of which group is more likely to cause social disturbances, he reasoned that it was the haves because they “can bring about changes with greater effect and greater speed” (1983, p. 118). Republicans disagree. In their analysis, it is the have-nots, the working class, that threaten social stability. When Mitch McConnell, the minority leader in the Senate, voices dismay at the ordinary folk at BLM protests, he expresses the view of the aristocratic haves who are suspicious of any expression that threatens the power balance.  To the haves the existing power balance is social stability.

Republican states are dominated by the interests of extractive industries, the companies that mine, drill and dig to get resources from the land. These industries are a critical component of our economy but they have an extractive mindset, regarding politicians as clay to be molded to their interests and people as replaceable resources to be mined for profit. Because many of these states have low population densities, profits have a greater vote than people. To retain their own  power, Republican governors and legislators lighten the pockets of workers to pad the pockets of big industry owners.

Whether it is sports, religion or politics, each side constructs justifications as castle walls to defend their position. Each side lobs fireballs of criticism into the strongholds of those on the opposite side, and each side is ready to extinguish any criticism before it does damage. For thousands of years, we have migrated across the globe because we could not negotiate with our families or others who held power. America is the land of people who ran away from wherever they were to get away from “those people.” We’re run out of room so now we run into, not away, from each other. Will we learn to negotiate with “those people” or will we destroy each other?

//////////////

Photo by Bill Stephan on Unsplash

Abbott, E. (1908). A study of the early history of child labor in America. American Journal of Sociology, 14(1), 15-37. doi:10.1086/211641

Machiavelli Niccolò̀. (1983). The Discourses. (B. Richardson & L. J. Walker, Trans., B. Crick, Ed.). Penguin Books.

Marx, K. (1994). Selected writings. (L. H. Simon, Ed.). Hackett. National Law Review. (2021, May 22). Unemployment insurance system update, Part III: Additional states opting out of federal unemployment benefits. Retrieved May 22, 2021, from https://www.natlawreview.com/article/unemployment-insurance-system-update-part-iii-additional-states-opting-out-federal

A Hook or a Bend

Leave a comment

May 16, 2021

by Steve Stofka

Eight-year-old Gwen shot out the back door, soccer ball in hand. “Dad!” she yelled. He released the safety handle on the mower as she ran across the yard to him. “Mom said she’ll take me to the game but you need to help me warm up.” When her dad bounced the ball to her, Gwen made a series of estimates of the ball’s trajectory, then corrected her estimates with the actual path of the ball as it bounced along the ground to her. As the ball neared her, she made a final OLS estimate of the ball’s destination, planted her feet and swung one foot at the ball. The side of her toe grazed the surface as it skittered past her and rolled toward the backyard fence. “Darn!” she said.

The Federal Reserve has had a lot of experience at estimating the trajectory of inflation. Just as everyone gets better with practice, so has the Fed. Gwen’s use of statistical methods is instinctive and unconscious; the Fed’s approach is quite deliberate and focused on the medium term. Unlike the Fed, the stock market acts with a short-term focus. Trading algorithms trained to react in milliseconds to key words in a data release make buy and sell orders. Human traders follow their lead, not wanting to be caught out in the open. If a trader makes a wrong turn but is among a crowd of traders that have made the same turn, they are less likely to come under scrutiny. While the market jogs along the beach, the Fed cruises offshore, watching for larger trends.

Because of the shutdown last April, economists estimated a strong uptick in prices as many states and localities began lifting sanctions and people spend money. Survey estimates of April’s inflation was high, about 3.6%, but the actual report showed an increase of 4.15%. By comparing the index this year to the index in April 2019, the rise over the two years was 4.3%, an average of 2.1% per year, exactly the average inflation since the year 2000. The rise was entirely due to “base effects,” a comparison of a data point with a previous data point that was abnormally low. On a vacation trip we slow down from 60 MPH to 30 MPH as we go through a town. When we speed up again on the other side of town, we have doubled our recent speed, but have returned to our average speed.

Our inflation expectations have stabilized over the past twenty years because we have been going the same 2.1% speed averaged over each quarter. For twenty years beginning in 1980, inflation began to decline .1% per quarter. It was like riding a bike on an almost level street with a barely noticeable decline. The pedaling lessens just a bit. Since 2000, the average quarterly change in inflation is a big fat zero. Any change becomes alarming.

Inflation has increased 3% over the past three months. A similar uptick occurred in the 4th quarter of 2009 as the economy emerged from a deep recession. The Fed computes a probability of inflation being greater than 2.5% and it rose to 60% this month, an increase from 20% last month (Series STLPPM). A similar jump occurred in April 2000 and April 2005.

A mainstream economic model depends on the assumption that workers estimate price changes and respond to their estimates with higher wage demands. Karl Marx, the 19th century economist, regarded this assumption as a fanciful notion. We pay attention to prices just as Gwen pays attention to the soccer ball, but the precision of our estimates degrade over longer periods of time. Every spring we remark on the increase in gas prices. Gas prices go up in the spring every year when refineries switch over to summer gas, which is more expensive to make. Really, we ask? Funny, I don’t remember that. Next year we will forget again. We lead busy lives and don’t have the mental storage to keep track of seasonal changes. It’s why we need multiple reminders about the tax filing deadline every year.

The Fed has a lot of data and a long memory. The Fed has adopted a wait and see approach to assess whether upward price pressures are due to base effects, supply bottlenecks and price surges typical in the initial recovery. Is this a jig and a jag of the coastline or a true bend in the land? Alan Greenspan, the second longest serving Fed chairman, reacted quickly – too quickly and too strongly – to inflationary pressures in 2004-2005 after the long slump of 2001-2003. He did not want to relive the slow recovery of a decade earlier after the 1990 recession. Those policy choices helped create the financial environment that led to the financial crisis. The Fed has more effective tools and data than it did then. Experience is a good teacher.

/////////////////

Photo by Jeremy Bishop on Unsplash. Coastline of O’ahu, U.S.

When Data Disappoints

Leave a comment

May 9, 2021

by Steve Stofka

The April labor report released this week was far below expectations. Economists expected an addition of one million jobs; the reported job increase was 266,000. Some analysts and politicians attributed the lower-than-expected job gains to generous unemployment benefits that dissuade job applicants from seeking employment. For centuries, the upper class have believed that the working class is inherently lazy, that people only work out of necessity. It is an implicit assumption of mainstream economics which is founded on the disutility of labor.

When asked to comment on the influence of “plussed up” unemployment benefits at a press conference on Friday, Treasury Secretary Janet Yellen raised a data point that contradicted that concern. States with the most generous unemployment benefits have the highest job-finding rates (White House, 2021). We would expect the opposite.

Ms. Yellen cited other factors with far greater importance. Topmost was the lack of childcare. 4.2 million women dropped out of the workforce in April 2020. Two million still have not returned. The two childcare facilities near my home in Denver are still closed.

A second factor was a mismatch of skills. Many entertainment venues are still closed. These typically employ younger workers under 25 with a modest skill set. They man ticket booths and concession stands at movie theaters. They take orders at restaurants cook food and bus tables. They stock and sort food items on our grocery shelves. Many have childcare needs, which are not being met. For these younger workers and their families, a modest wage that barely covers childcare expenses is not an attractive option.

The crunch in the construction industry has been an ongoing development for more than a decade. I spoke to a dental assistant this week, a man in his 20s. During the financial crisis, many parents with blue collar skills lost their jobs. Parents with some college education or a degree didn’t. Many kids compared their circumstances with others at school and were attracted to white collar jobs as being more permanent, even if they didn’t pay as much. This younger generation, dubbed Gen Z, experienced the disruptions to their homelife brought on by the financial crisis. Now they are experiencing another severe crisis as adults. Will they spend most of their lives seeking stability?

Economists and policymakers argue: are employers not offering a high enough wage? Are the unemployed unwilling to lower their wage expectations? The economic euphemism is “sticky prices” – that prices are slow to change to evolving circumstances. A more accurate term would be sticky contracts. Both employers and job applicants have existing arrangements – leases, childcare needs, school district preferences, mortgages, rents – at prices that are resistant to change.

The heartening aspect of this debate is that we are discussing these issues. The prior administration would call a disappointing labor report “fake news.” They would have cast doubt on the intentions of government officials who compiled the data as a conspiracy against the former President. A smart 8-year-old could tell a more convincing lie. After four years, it’s refreshing to have an adult public conversation.

/////////////////

Photo by Christina @ wocintechchat.com on Unsplash

White House. (2021, May 08). Press briefing by press SECRETARY Jen Psaki and Secretary of the Treasury Janet Yellen, May 7, 2021. Retrieved May 09, 2021, from https://www.whitehouse.gov/briefing-room/press-briefings/2021/05/07/press-briefing-by-press-secretary-jen-psaki-and-secretary-of-the-treasury-janet-yellen-may-7-2021/